Canadian regulators alleged on Thursday that a Silvercorp Metals Inc. short-seller committed fraud when he wrote negative reports about the mining company in order to profit from a drop in the miner’s stock.

The accusation from the British Columbia Securities Commission is a sharp reversal of fortunes for short seller Jon Carnes, who operates New York-based EOS Holdings LLC and runs a financial blog, called Alfredlittle.com, where he issued his first damning report against Silvercorp in September, 2011.

A worker removes a freshly made bar of silver from a mould at the KGHM smelter.
Reuters

Gallery

Mr. Carnes’s report alleged that the company inflated its profits and misled investors about production levels at its main silver mine in China. Since then, a Canadian named Huang Kun, who helped gather data on Silvercorp for Mr. Carnes, has been thrown into a Chinese jail, and Mr. Carnes has spent more than $2-million defending himself against Silvercorp’s defamation suit.

Now the B.C. regulator is alleging that Mr. Carnes lied about his investing experience and created a fake research group, fake names and fake research in order to help him profit from his negative reports, including his report on Silvercorp.

According to the regulator, Mr. Carnes started eyeing Silvercorp in June, 2011. At the time, one of Mr. Carnes’s employees started gathering information for the negative Silvercorp report and said: “Let’s whack [Silvercorp] before others beat us to [it].”

The regulator alleges that Mr. Carnes started building his short position in Silvercorp in August, 2011. When Mr. Carnes got wind that other short sellers were targeting Silvercorp, he said: “We gotta nail [Silvercorp] quick. I think everyone is about to be onto it.”

The securities commission says Mr. Carnes tried to find a mining expert to support his theory that Silvercorp’s regulatory filings in China contradicted its North American securities filings for its silver mine. The Chinese reports had lower production, quality and resource estimates that regulators say were because of different reporting standards in China and the West.

Regulators allege that when Mr. Carnes could not find an expert to support his theory, he anonymously issued his negative report against Silvercorp on his Alfredlittle.com blog.

After the report was issued, the company’s stock lost 20 per cent and Mr. Carnes made a profit of $2.8-million (U.S.) by covering his short position in the Vancouver-based company, the B.C. securities regulator said.

Silvercorp shares closed at $2.40 (Canadian) on the Toronto Stock Exchange on Thursday, down from the $9 it was trading at before the report was made public.

Mr. Huang, the Canadian researcher, is still in a Chinese jail.

A Globe and Mail investigation suggested that Silvercorp and its executives worked with Chinese authorities to help pay for the investigation against Mr. Huang.

Mr. Carnes, whose website describes him as a whistle-blower who exposed numerous Chinese stock frauds, said he was shocked and surprised when he found out about the provincial regulator’s allegations.

For Silvercorp, it’s a victory. “Silvercorp has always maintained it has been a victim of a short and distort campaign,” Lorne Waldman, Silvercorp’s vice-president, said in an e-mail.

Mr. Carnes maintains that the B.C. securities regulator, the U.S. Securities and Exchange Commission and the Royal Canadian Mounted Police are investigating Silvercorp’s activities. But the B.C. regulator said it had concluded its investigation of Silvercorp.

The SEC had no comment. The RCMP could not immediately be reached for comment.

Restrictions

All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. Thomson Reuters is not liable for any errors or delays in Thomson Reuters content, or for any actions taken in reliance on such content. ‘Thomson Reuters’ and the Thomson Reuters logo are trademarks of Thomson Reuters and its affiliated companies.